Category: Economics

Why have countries moved away from wealth taxes?

From the excellent Timothy Taylor:

Back in 1990, 12 high-income countries had wealth taxes. By 2017, that had dropped to four: France, Norway, Spain, and Switzerland (In 2018, France changed its wealth tax so that it applied only to real estate, not to financial assets.)  The OECD describes the reasons why other countries have been dropping wealth taxes, along with providing a balanced pro-and-con of the arguments over wealth taxes, in its report The Role and Design of Net Wealth Taxes in the OECD (April 2018).

For the OECD, the bottom line is that it is reasonable for policy-makers to be concerned about the rising inequality of wealth and large concentrations of wealth But it also points out that if a country has reasonable methods of taxing capital gains, inheritances, intergenerational gifts, and property, a combination of these approaches are typically preferable to a wealth tax.  The report notes: “Overall … from both an efficiency and an equity perspective, there are limited arguments for having a net wealth tax on top of well-designed capital income taxes –including taxes on capital gains – and inheritance taxes, but that there are arguments for having a net wealth tax as an (imperfect) substitute for these taxes.”

Here, I want to use the OECD report to dig a little deeper into what wealth taxes mean, and some of the practical problems they present.

The most prominent proposals for a US wealth tax would apply only to those with extreme wealth, like those with more than $50 million in wealth.  However, European countries typically imposed wealth taxes at much lower levels of wealth…

It’s interesting, then, that in these European countries the wealth tax generally accounted for only a small amount of government revenue. The OECD writes: “In 2016, tax revenues from individual net wealth taxes ranged from 0.2% of GDP in Spain to 1.0% of GDP in Switzerland. As a share of total tax revenues, they ranged from 0.5% in France to 3.7% in Switzerland … Switzerland has always stood out as an exception, with tax revenues from individual net wealth taxes which have been consistently higher than in other countries …” However, Switzerland apparently has no property tax, and instead uses the wealth tax as a substitute.

The fact that wealth taxes collect relative little is part of the reason that a number of countries decided that they weren’t worth the bother. In addition, it suggests that a US wealth tax which doesn’t kick in until $50 million in wealth or more will not raise meaningfully large amounts of revenue.

There are many more excellent points at the link.  Here is another:

A wealth tax will tend to encourage borrowing. Total wealth is equal to the value of assets minus the value of debts. Thus, one way to avoid a wealth tax is to borrow a lot of money, in ways that may or may not be socially beneficial.

Tim concludes:

To me, many of the endorsements of a wealth tax feels more like expressions of righteous exasperation than like serious and considered policy proposals.

Recommended.  If you would like another point of view, Saez and Zucman respond to some criticisms here.

The New Zealand real estate problem, with reference to Palmerston North

From my email, from Ryan Reynolds:

I’ve worked in Palmerston North, as well as Tauranga and Auckland (all briefly). I’m Australian too, so my perspective may be shaded vs what a Kiwi or someone from further afield might say.

The major issue is just supply of new dwellings and the permitting and development process. All the rest of the factors noted point to increases in demand (immigration, natural population growth, easy credit, real income growth, tax structures, chinese buyers) – but without a limit on supply you would have expected those factors to result in a building boom not a rapid price appreciation. That’s obviously not the way reality has played out.

From a permitting side, the Resource Management Act heavily constrains lots of building decisions and imposes a lot of bureaucracy (and time delays and uncertainty). Less specifically, Kiwi’s appear to have strong preferences for careful building and urban sprawl in lots of dimensions. That includes specific issues like building heights, overshadowing, retaining views of specific hills or valleys (including Maori heritage sites) and retaining its environmental and cultural heritage (however brief it may seem to outsiders). These preferences are captured in major urban plans which set out acceptable terms for developments, but often even urban plans won’t contain enough zoned land to meet demand (see the bun fight over the Auckland Unitary Plan from 2016), and even then those plans took years to put together. This plays out in a strong community undercurrent and politicians of both stripes use scare campaigns about the horrors of inappropriate development. Anything two stories or over can count as ‘inappropriate’.

From a policy perspective there seems to be no understanding of the practical trade off between housing demand and conservation, except from economists outside the planning departments (see NZ Initative or Michael Reddell, ex RBNZ) or from the central government threatening to unwind urban plans.

The second issue is that NZ also has a lot of partly and wholly government owned and operated utilities (water supply, networks and wastewater; electricity and gas networks; electricity generation) and services provided under government monopolies required for new developments (roads, education, healthcare, and other social services). In many cases the entities charged with providing these services are capital and/or budget constrained and they don’t have the funds to provide major new capex works in the short to medium term. Furthermore, the revenues earned from providing these services are often inadequate to cover economic costs. For instance, water supply and wastewater is provided at below cost price in many cases in NZ, and in large parts of the country water supply is un-metered. And there is serious community opposition to either privatization or changes in tariffs. As a consequence though, capex projects in the water sector are effectively large donations of capital for no return for the water corporation. As is the case for virtually all roads, schools, or hospital projects, any of which could prevent or stall major new urban developments. So even if new land was zoned as ‘fit for development’ (which it won’t be), the entities required to facilitate that development don’t have the funds to do so and nobody else is allowed to fill that gap.

And yes, Palmerston North is still dull. But then people say that Switzerland is dull too. I’ve seen much worse.

Poor Sleep Makes People Poor: The Costs of India Standard Time

After Independence, India adopted a single time zone for the entire country. India spans as much 1,822 miles in the East-West direction or 29 degrees longitude. If India followed the convention of a new time zone every 15 degrees it would have at least two time zones. With just one zone the sun can rise two hours earlier in the East than in the far West.

In an original and surprising paper, Maulik Jagnani, argues that India’s single time zone reduces the quality of sleep, especially of poor children and this reduces the quality of their education. Why does a nominal change impact real variables? The school day starts at more or less the same clock-hour everywhere in India but children go to bed later in places where the sun sets later. Thus, children in the west get less sleep than children in the east and this shows up in their education levels and later even in their wages!

I find that later sunset causes school-age children to begin sleep later, but does not affect wake-up times. An hour (approximately two standard deviation) delay in sunset time reduces children’s sleep by 30 minutes. I also show that later sunset reduces students’ time spent on homework or studying, and time spent on formal and informal work by child laborers,while increasing time spent on indoor leisure for all children. This result is consistent with a model where sleep is productivity-enhancing and increases the marginal returns of study effort for students and work effort for child laborers.

The second part of the paper examines the consequent lifetime impacts of later sunset on stock indicators of children’s academic outcomes. I use nationally-representative data from the 2015 India Demographic and Health Survey (DHS) to estimate how children’s education outcomes co-vary with annual average sunset time across eastern and western locations within a district. I find that an hour (approximately two standard deviation)delay in annual average sunset time reduces years of education by 0.8 years, and children in geographic locations with later sunset are less likely to complete primary and middle school.

Addendum: The importance of sleep and coordination of sleep with circadian rhythms is also illustrated by the phenomena of teenagers who get more sleep and do better in school when school opening is better timed with adolescent sleep patterns. As a result, we are seeing a movement to push school opening times later for teenagers. Perhaps India will adopt a second time zone.

Why is capital so often flowing out of emerging economies?

Sam asks me:

I was struck by something that Peter Thiel has talked a bit about in recent months, namely that capital is flowing ‘uphill’ from China to the U.S., which is not what the neoclassical model would predict. I’ve read a few of the general objections to this “Lucas Paradox” (e.g. differences in human capital, credit risks etc.), but would love to know what your take on this phenomenon is.

I would cite a few factors:

1. China is a high-savings country with high political risk.  In general savings don’t have that many safe outlets, noting the third largest government debt market in the world is that of Italy.  So of course much of this money flows into the United States.  And China is hardly the only high-savings emerging economy.

2. China makes it costly or impossible for many kinds of American firms and individuals to invest directly in China, this now being a familiar story.  The Chinese stock market also is limited and unrepresentative of the Chinese economy as a whole.

3. American capital will not flow to Russia the way British capital once sopped up opportunities in Argentina and elsewhere in the late 19th and early 20th centuries.  The end of gunboat diplomacy is one but not the only reason for this.

4. State-owned industry is a bigger factor today than in earlier times.  For instance, if Aramco is privatized, plenty of private Western capital will invest in the company.  But so far it is not.

5. Savings rates are often especially high during times of rapid income growth, because preferences have not yet caught up with income (an underrated mechanism, which perhaps someday will get its own blog post).  Emerging economies in much earlier times did not have such rapid growth, and therefore they did not have comparable huge savings surpluses to dispose of.

6. The United States has issued a lot of debt, whereas the earlier Great Britain ran a balanced budget at least intertemporally.

7. America has accumulated enough wealth so that flows of household savings can be relatively low.  Plus we are irresponsible — so good at marketing and spending! — and thus we do not save enough either.

8. If you counted holdings of American dollars, as a reserve currency, as “America exporting its rule of law,” the flow of funds would look less strange.

Which other reasons?

The wealth tax and privacy — from the comments

Despite the unnecessary duplication (FATCA etc), I’m actually in favor of requiring banks to disclose how much income US taxpayers earn on ther accounts in the US and abroad. Unfortunately, if you are going to have an income tax system, you can’t simply rely on everyone voluntarily reporting. But, this also raises serious privacy concerns that need to be balanced. The wealth tax on all or most all assets would significantly alter the current balance between disclosure and privacy. As noted in the article, *everything* would need to be disclosed to the IRS *every year* much like an annual estate tax return. Expect substantial additional reporting requirements on all assets. Think that won’t apply to you? How else are they going to know you don’t have $50 million hidden somewhere? How are *taxpayers* going to know they don’t meet that (or some other) threshold ? Trust me, lawyers and accountants, (legitimately) worrying about their own potential liability, will insist that far more people undergo these audits internally just to make sure they are not above the limit.

These privacy issues also have potentially serious political implications. I suppose Bill and Hillary and Barrack and Michelle (add your own list) would be subject to these annual wealth tax returns. Annual audit by the IRS on everything? Do they really want the Trump administration (or some other) having access to all that? This sounds like a potential special prosecutor on steroids and one that is not always going to be politically neutral. I see the potential here for a lot of political abuse and not just from one side or the other.

That is from Vivian Darkbloom on MR and in the LOC, with other good points in the comment too.

Do tax cuts produce more Einsteins?

Bell, Chetty, Jaravel, Petkova and Van Reenen in a new working paper say not so much.  And indeed their intuitions are not surprising.  Tax cuts boost the prospects of those individuals who already exposed to the possibility of being innovators, and that is not everyone.  Talent searches — to identify and mobilize potential creators — might be more productive.  Furthermore, tax cuts could just draw in lots of marginal innovators, whereas the really important contributions come from a fairly small number of top performers.  Those top performers reap such high returns/rents that they will not so much be deterred by higher tax rates.

The key decision in their model is whether or not to enter the innovation sector, and in that setting you can see that higher marginal tax rates probably do not stop Brin and Page from creating Google and earning lots of money.  A smaller fraction of the value they created is still a huge sum.

And yet I am not convinced.  There is another way to think about and model the process.  Imagine instead that innovation is a matching process, whereby the most talented creators must be matched to the appropriate infrastructures and ecologies.  A given entrepreneur can choose to “think big” or “go small,” the latter involving less work and less risk.  Optimal marginal tax rates can be much lower in that model, because there is easier substitution into lower-valued activities, just as optimal tax rates are much lower in matching models for CEO productivity and pay.  Pushing the best CEOs to less important firms can bring big losses in output, just as pushing the best innovators to less important projects can work pretty much the same way.

You might also introduce into the model venture capitalists, namely people and firms who (among other things) help match innovators to the right projects.  If you tax innovators, might some of the incidence fall upon venture capitalists, who now must accept a lower percent of the return from the project?  And what are the secondary consequences of that?  I don’t know, but they might be quite different from what is laid out in this model.  Tax incidence should not be treated as so simple.  Innovation is not a solo endeavor (as progressives will insist on telling us in other settings), rather it is about clusters of excellence and mutual inspirations.  And when clusters matter, there is a positive externality from innovation from each innovator, which again militates in favor of a lower tax rate on innovators.  If anything, a “clusters model” would seem to favor taxes on land, not on innovation.  Furthermore, perhaps we should even subsidize top innovators.

The general point is that when matching and clusters matter, optimal rates of taxation on innovators tend to be lower.

How easy is it to administer a wealth tax?

A third issue is logistical. A wealth tax would be like an estate tax levied every year. Figuring out the tax owed on large estates is complicated, costly and time-consuming. The Internal Revenue Service gives estates a year to file a return, but even then, executors often have to file extensions. And on the other end, auditors go through the returns, which can take years before an estate is settled.

The process requires not just lawyers and accountants but valuation experts who assess the worth of assets like closely held family businesses.

“It would be a highly cumbersome tax return to prepare on an annual basis,” said Jeff Moes, executive vice president and chief fiduciary officer at FineMark National Bank & Trust, which serves high-net-worth clients. “Every federal estate tax goes through an audit, and presumably this would go through an audit as well. They’d have to figure out if the valuation methodology is correct.”

“A billionaire would have a return that would be literally three feet high,” he added. “Our $100 million clients own multiple closely held businesses. All of them would require an expert valuation and five-year financials.”

And then the government would need to have enough auditors to verify everything that was submitted. In 2018, for example, an estimated 4,000 estate tax returns will be filed, with tax owed on 1,900 of them. That’s a tenth the number of tax returns that would be filed under Ms. Warren’s wealth tax plan.

Here is more from Paul Sullivan at the NYT.

A MimbleWimble Explainer

TechnologyReview: In July 2016, someone using the name Tom Elvis Jedusor (the real name of Lord Voldemort, the main villain in the Harry Potter universe, in the French edition) posted a link to a text file in a chat room frequented by Bitcoin researchers. Voldemort’s document described MimbleWimble, a blockchain system that would hide the identifying information associated with Bitcoin transactions.

…The person who started Grin [one of the first new currencies built on a blockchain that implements MimbleWimble] is also pseudonymous, going by the name Ignotus Peverell (the original owner of Harry’s invisibility cloak), and has never been seen. Peverell recently used a text-to-speech program to address attendees at a Grin conference.

So to sum up, Grin is a new currency on the MimbleWimble blockchain imagined by Lord Voldemort and implemented by the invisible Ignotus Peverell.

…Eric Meltzer, an investor for crypto-focused Primitive Ventures, recently estimated that $100 million of “mostly VC money” has already been invested in Grin mining operations.

New Zealand facts of the day

All of New Zealand’s major cities were rated as “seriously” or “severely” unaffordable, with a house in the least expensive city, Palmerston North, priced at five times the median income.

Mr. Pavletich, one of the report’s authors, said smaller markets like Tauranga, a coastal city on the North Island with a population of 128,000, had seen an influx of people who had left Auckland in search of more affordable housing. Average property values in Tauranga had risen to $497,000 from $304,000 in the last five years, and Demographia now rated it among the 10 least affordable cities in the world — along with famously expensive locales such as Hong Kong, San Francisco, Sydney and Vancouver, British Columbia.

People, I have been to Palmerston North (though not Tauranga, which seemed too empty and remote, now the fifth largest urban cluster in a country of 4.8 million), way back in the 1990s, and I recall a feeling of dullness above all else.  If you had asked me whether this outcome was possible, I sooner would have thought Donald Trump would be elected president.

Here is the full NYT story by Charlotte Graham-McLay.  P.s. they haven’t built enough homes.

Biotech on the Blockchain?

Bloomberg: In a novel approach for the biotechnology industry, small-cap company Agenus Inc. is aiming to raise $50 million to $100 million by issuing digital securities backed by future sales of an experimental cancer drug.

The digital securities will allow investors to bet on future sales of single products and will have a limited impact on shareholders’ equity, the company said. Agenus plans to offer at least 25 million of what it calls biotech electronic security tokens, or BESTs, to certain high-net-worth individuals and institutional investors starting Feb. 15.

I find this puzzling. First, why break out one drug from the rest of the firm? Investors generally want diversification and this is the opposite. Agenus is basically saying the rest of the firm is a value suck. Second, one of the virtues of the blockchain is that it allows for easy trade but the SEC requires that to buy these securities you must be an accredited investor and as such there are typically encumbrances on transfer. Thus, putting the securities on the blockchain doesn’t lower transaction costs, the way it could for other assets.

A lot of assets will be tokenized (i.e. securitized on the blockchain) in the future so this is an area to watch but to succeed tokenization must increase diversification and reduce transaction costs and this tokenization does neither.

IQ economics > behavioral economics

We use administrative and survey-based micro data to study the relationship between cognitive abilities (IQ), the formation of economic expectations, and the choices of a representative male population. Men above the median IQ (high-IQ men) display 50% lower forecast errors for inflation than other men. The inflation expectations and perceptions of high-IQ men, but not others, are positively correlated over time. High-IQ men are also less likely to round and to forecast implausible values. In terms of choice, only high-IQ men increase their propensity to consume when expecting higher inflation as the consumer Euler equation prescribes. High-IQ men are also forward-looking — they are more likely to save for retirement conditional on saving. Education levels, income, socio-economic status, and employment status, although important, do not explain the variation in expectations and choice by IQ. Our results have implications for heterogeneous-beliefs models of household consumption, saving, and investment.

That is from a new NBER working paper by Francesco D’Acunto, Daniel Hoang, Maritta Paloviita, and Michael Weber.

Me on wealth taxes from 2013

I don’t usually like to rerun material, but every now and then it seems appropriate.  Here is the opening paragraph from my NYT column from six years ago:

If you’d like to know where American political debates are headed, the data suggest a simple answer. The next major struggle — in economic terms at least — will be over whether taxes on personal wealth should rise — and by how much.

There is much more at the link.

My Conversation with Noel Johnson and Mark Koyama

Lots of economic history in this one, with the underlying themes of persecution and tolerance, here is the audio and video.

We talk about the evolution of anti-Semitism, how the Black Death influenced Europe, the economics and politics of volcanic eruptions, how much prejudice will come back, amateur astronomy,  Jared Diamond, cousin marriage and the origins of the West, why England was a coherent nation-state so early, the origins of the Industrial Revolution, Schindler’s List, and more.  I split the time between the two, here is one excerpt:

JOHNSON: Mark and I have done a lot of work on building datasets of Jewish persecution and Jewish expulsions at the city level and the country level in Europe over a very long period of time. And a question that I, for one, don’t fully understand is, you don’t need to actually kill all the Jews or expel them in order to extract resources from them. In fact, in some way, this is off the equilibrium path. You’re no longer in some optimal equilibrium for both the ruler and for the Jewish community.

Oftentimes, these Jewish communities would be expelled from a city, they would be invited to come back, and they would come back — in 5, 10, 15 years, sometimes even shorter. But that’s a little bit easier to understand.

In the case I gave you in England in 1290s, I think I understand a little bit about why it might have happened that way. I think it was signaling credibility in some political compact between the king and the nobles, but I’m not sure. But that’s an example of top down.

Other times, clearly, people are . . . You have, say, guilds moving against these Jewish communities. An example of this would be in 1614, when the most well-known Jewish persecution was in Frankfurt am Main. It was called the Fettmilch Massacre. Fettmilch was a baker. He was in guild, and he was upset about the terms of the political deal between the city rulers — the city council — and what the guilds were getting. One of the things that the guilds wanted were the Jews to be expelled. This was competition in some sense.

There was this bit from me:

COWEN: If the Black Death raised wages, does that mean that immigration today lowers wages?

And:

COWEN: Large volcanic eruptions earlier in history. From an economic point of view, what’s the single most interesting thing we know about them?

JOHNSON: I think what’s very interesting about the volcanic eruptions is that we are discovering more and more that they may have played a large role in political change that occurred. Joe Manning at Yale, and I believe his graduate student (Bruce M.S. Campbell) have been doing work on . . . They looked at a series of volcanic eruptions that led to the end of the pharaonic empire. That ended around 30 or 60 BC, I forget. Right around that time.

That was an empire that lasted for 300 years, but they experienced all these crop failures. And then once you look at it, you see that in Indonesia, all these major volcanic eruptions were happening in perfect timing with these crop failures that were taking place. Actually, they can tell from looking at the Nile and how much it’s flooding and things.

COWEN: Politics becomes nastier when the volcano goes off?

And from Mark Koyama:

COWEN: Why was China, as a nation or territory, so large so early in world history?

KOYAMA: Yeah, that’s a great question. There are several potential explanations, one of which is geographic. Another one would be an argument from the writing system. But I think the geography story is quite important. Jared Diamond, building on people like Eric Jones, argued that China’s geography . . .

Essentially there are two core geographic regions in China around the Yellow and Yangtze river deltas, which produced a huge amount of grain or rice. If you control those core regions, you can raise large armies. You can have a large population and dominate the subsequent regions.

Whereas, the argument is for Europe that these core regions are, perhaps, arguably more separated by geographical boundaries. The limitation of that argument on its own is that geography is static, so it doesn’t really tell you anything about the timing.

The interesting thing about China, in my view, is not just that it was once unified, or unified early. But it’s persistently unified. It reunifies. Interestingly enough, the periods of de-unification get consistently smaller. So there are always periods where it’s fragmented, like the warlord period in the early 20th century, but over time may become smaller.

Europe doesn’t seem to have that centrifugal force, so a lot of Europe is unified by the Romans, but it’s not able to come back together along those lines later.

And the argument that I put forward in an article with Tuan-Hwee Sng and Chiu Yu Ko of National University of Singapore is that it’s not just the core geographical reason. That’s part of it. But actually, the periodic threat from a nomadic steppe is another key factor.

This is geographic because China has a very sharp slope from really productive agricultural land to land which is only fit for horses, for Eurasian steppe. China could be invaded very easily from the north by these steppe nomads, whereas Europe — it was much less vulnerable to this. And that helps to explain why the Chinese state is often a northern state.

So if I can add, if you think about China today, or even China in the past, the really productive land — a lot of it’s in the quite far south, in Shanghai, Yangtze delta. But the political center of China is near Beijing, or it’s in the north. And that’s due to this political economy threat from the steppe. And it’s these periodic steppe invasions which we argue are responsible for the centralization, an almost militarized character of the Chinese state through history.

And:

COWEN: Max Weber. Overrated or underrated?

KOYAMA: Underrated.

COWEN: Why?

KOYAMA: Because most people just know the Protestant theory, and they misreport it. Whereas, actually, his most interesting stuff is on Chinese religion and ancient Judaism. And the role of —

COWEN: The history of music, right?

There is much more at the link.  I am very happy to recommend their forthcoming book Persecution and Tolerance: The Long Road to Religious Freedom.

Does Amazon have an investing advantage?

Thought experiment: How would Amazon enter the venture capital business?

Use data from AWS to inform investment decisions

Amazon can leverage its proprietary data from AWS (Amazon Web Services).  Amazon’s edge is that most of the best technology start-ups are built on its services.  Amazon has a lot of information about how much these companies are spending, what services they use, what technologies they use, and more.

The AWS data could be extremely predictive and give Amazon early signs that companies are growing fast or reaching an inflection point.  And it can use the data as a better diligence check of a company … for instance, the data could help determine which companies that claim they have “AI” are real and which are just marketing.

Using this data to invest in public companies would likely not be legal since it could be deemed as inside information.   But using it for private companies is something Amazon could do.

There is much more at the link from Auren Hoffman.